NAVIGATING
DISPUTES: THE ROLE OF ARBITRATION IN ESG COMPLIANCE UNDER COMPANIES ACT, 2013
Introduction
The incorporation of Environmental, Social, and
Governance (ESG) concepts into commercial transactions has become a critical
concern in the ever-changing environment of corporate governance. This has led
to increased scrutiny of the company’s activities ensuring that the companies
adhered to ESG obligations. It also started discourse-related disclosures and
disputes arising out of commercial transactions and the need for an effective
dispute resolution mechanism.
In this article, the author will try to show how
arbitration becomes a crucial and best-suited method for settling disputes
arising out of ESG compliance obligations to compel companies to comply with
developing ESG standards in their corporate practices. This article will
further explore the role of arbitration as an impartial, adaptable, and
expert-driven mechanism for resolving disputes pertaining to ESG due to its
procedural flexibility, neutrality, and party autonomy principles.
Understanding ESG in Corporate
Transactions
The term ESG contains three words Environment,
Social, and Governance each of these means different things. All these three
terms are used to scrutinize cooperation for investment purposes and the
sustainability of their economic activity. They help to guide the
decision-making of organizations for the allocation of resources to ensure the
sustainability of economic activity and long-term financial performance. All
these three terminologies have their role to play in ESG implementation which
are given below: -
Environmental: The “E” in ESG stands for
“Environmental” and focuses on the corporation's attitude towards the
environment. This criterion measures the steps companies take to safeguard or
protect the environment, emphasizing matters like pollution, waste management,
biodiversity, deforestation, greenhouse gas emissions, and climate change.
Companies are also examining their environmental impact more carefully as a
part of their due diligence procedure by assessing company resource management
compliance with environmental law and carbon footprints.
Social: The “S” in ESG stands for
“Social”. This facet looks at corporation's social impact on individuals, and
groups through its work, policies, and social development goals. It takes into
account human rights, diversity, inclusivity, employee relations, working
conditions, and the wider implications on regional and international societies.
Governance: The “G” in ESG stands for
“Governance”. It focuses on internal systems of rules, controls, and practices
that ensure that corporations run in a transparent manner upholding integrity
while selecting its leaders and being accountable to their shareholders. It
addresses topics such as tax planning, CEO compensation, board diversity and
structure, bribery and corruption, and shareholder rights, etc.
Further, the concept of ESG was incorporated into
commercial transactions by incorporating ESG clauses in the commercial
agreement. These ESG clauses were incorporated into the contract between the
organizations to enable risk allocation or measure their progress in attaining
ESG-related goals mentioned in the ESG clause. This incorporation of ESG
clauses in contracts has also started influencing how organizations invest,
run, and conduct mergers and acquisitions (M&A). Further, the disputes that
can arise out of ESG obligations may be of various types. They can arise out of
obligations put through binding agreements, international treaties,
conventions, national laws, etc.
Companies Act and ESG compliance
The Companies Act, which acts as the legislative
framework guiding Indian companies toward sustainable and ethical business
practices, is essential to the enforcement of ESG compliance. Certain parts of
the Companies Act, 2013 have been specially crafted to ensure that companies
take into account their influence on society, the environment, and governance
in addition to profit. The provisions that deal with the responsibility of the
company towards ESG compliance are given below:
Mandatory CSR Spending: Companies with a defined net
worth, turnover, or net profit are required by Section 135 of the Companies
Act, read with the Companies (Corporate Social Responsibility Policy) Rules,
2014, to set aside a part of their income for CSR initiatives. This guarantees
that Companies engage in corporate operations that include social and
environmental issues.
Director's Duties: The Act establishes that
directors must act in the best interest of the environment and the community.
Directors are required by Section 166 to take into account how their choices
will affect different stakeholders, including the environment.
Board Report: - Under Section 134 of the
Companies Act the Board of Directors is required to include an energy
conservation report with the annual financial statement of the company this
provision ensures that the company works towards environmental sustainability
by conserving the energy and being accountable for it.
Female Director: Section 149 of the Companies
Act, 2013 requires that every publicly listed company must have a female
director on their board. This ensures that the board is diversified and
inclusive which ensures accountability and equity within the board. This
section covers the social and governance part of the ESG.
Audit Committee: Section 177 of the Companies Act
requires the board of every publicly listed company to form an audit committee
consisting of a minimum of three directors with independent directors forming a
majority. This section along with Regulation 18 of the listing regulation
requires that the chairperson of the audit committee be an independent
director. This brings transparency within the company falling within the
governance part of the ESG.
This shows that the Companies Act both promotes and
mandates ESG compliance, making it a crucial component of corporate governance
in India.
Arbitration as a mechanism to
resolve ESG disputes
Arbitration as a dispute resolution mechanism
provides a special platform for addressing complex issues, especially when it
comes to treaty-based and commercial contract claims. It is expected to become
more and more important in ESG dispute resolution as a result of the rise in
ESG-related contractual terms and the addition of ESG provisions to
international investment treaties. Arbitration's consensual nature and the
capacity to select arbitrators with specific knowledge of ESG issues make it a
useful instrument for controlling and reducing ESG risks.
Under the framework of the Companies Act,
arbitration is becoming a prominent dispute resolution procedure for ESG
compliance. In the recent past arbitration came out as a reliable process for
resolving disputes as it provides a resolution path that is in line with the
global trend of incorporating ESG ideals into investment treaties and
commercial contracts.
Arbitration may become the first choice for
companies to resolve their dispute as it guarantees that the disputes are
settled quickly and transparently. The following benefits of arbitration as a
mechanism to resolve ESG disputes are: -
Neutrality: For international parties who
might be worried about prejudice in other legal systems or court litigation,
arbitration offers an impartial forum that is separate from national courts.
Time-bound process: - Arbitration is time time-bound
process where disputes need to be resolved in a fixed time. Hence it involves
fewer procedural hurdles, this also makes arbitration a preferred mode of
dispute resolution mechanism where disputes are settled more efficiently and
quickly. On the other hand, litigation takes a longer time period due to its
procedural hurdles. This also makes arbitration a preferred dispute resolution
procedure.
Expertise: In arbitration, the parties have
the liberty to choose their arbitrators who are experts in environmental law,
corporate governance, human rights, and other ESG issues. This guarantees that
professionals who comprehend the complexities of ESG concerns will be
evaluating the disagreement.
Flexibility: Parties can customize the
arbitration procedure to meet the unique requirements of their dispute
according to its well-known procedural flexibility as the procedure of
arbitration is decided by the parties. This may entail establishing deadlines,
selecting relevant legislation, and figuring out the parameters of document
disclosure.
Confidentiality: Arbitration is a process that is
conducted between the disputing parties and kept out of the preview of the
public to maintain confidentiality. Sensitive information is frequently at
issue in ESG disputes. Confidentiality in arbitration is conceivable, something
that isn't always achievable in open court procedures. This safeguards the
party's reputation as well as the private nature of ESG strategies.
Enforceability: Because of agreements like the
New York Convention, arbitral awards are typically easier to uphold worldwide
than judicial rulings. For ESG disputes, which have international implications
the worldwide enforceability of arbitral awards makes it a first choice for
organizations.
Drafting an effective Arbitration
Clauses for ESG Disputes
An effective arbitration clause for ESG disputes
can be where the obligation related to the contracting parties related to
compliance of ESG is inserted in contracts which contains assurances or targets
related to ESG issues or disclosure and reporting obligations. They can be
inserted in commercial contracts, sales, and supply agreements, mergers and
acquisitions, etc. These clauses are inserted in a contract to ensure that the
contracting parties comply with the applicable ESG policies.
Challenges of making arbitration
a mechanism for ESG compliance
Arbitration is a potentially useful tool for
settling ESG issues because of its flexibility and experience, but certain obstacles
need to be overcome to make sure that everyone who is engaged benefits from the
process. Hence, evaluating its benefits and challenges is crucial when
considering arbitration's role in ESG compliance under the Companies Act.
Challenges: -
Complexity: The complexity of ESG disputes
revies detailed examination of expert witnesses and evidence which is difficult
to do in arbitration than in courts. Courts can examine the evidence and
witness in a much-nuanced way with the help of the state which is essential in
deciding ESG disputes.
Cost: When it comes to arbitration
cost is one of the major problems that the parties face unlike in court where
the court fees are minimal in nature arbitration is an expensive process. This
poses difficulty for the parties who want to choose arbitration as a dispute
resolution process.
Public Interest: Public interest is at the heart
of ESG disputes as they are harming the public at large this poses a problem as
arbitration proceedings are private where the information or dispute is only
available to the parties involved in the arbitration.
Conclusion
Arbitration as a mechanism of dispute resolution
appears to be a viable means of settling ESG conflicts under the Companies Act,
and this seems to be the direction that arbitration will take in the future.
Arbitration might become a key component of the ESG dispute resolution process.
In line with the worldwide movement toward
sustainability and ethical business practices arbitration is able to provide a
customized, effective, and professional dispute resolution process by adjusting
to the particular requirements of ESG issues.
The inclusion of ESG clauses in contracts will be
essential in ensuring that ESG principles are upheld in the event of a dispute
as companies are incorporating these concepts into their operations more and
more. All parties involved in the arbitration process must work together to
improve arbitration procedures and bring them into line with ESG principles.
The aim is to establish a conflict resolution process that advances the more
general goals of social fairness, environmental preservation, and responsible
governance.
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